Lawsuit Challenging Obamacare Subsidies Moves Forward

Judge rejects Obama administration’s motion to dismiss suit

A federal judge allowed a lawsuit challenging the legality of some Obamacare subsidies to proceed on Monday, ruling against the Obama administration.

The judge in Oklahoma ruled that the state of Oklahoma has the legal standing to sue the federal government over federal subsidies in federally run health insurance exchanges.

The Affordable Care Act, or Obamacare, requires that each state has its own exchange where individuals can buy health insurance. If a state refuses to set up its own exchange, the federal government steps in and sets up the exchange for it.

Oklahoma Attorney General Scott Pruitt argues in the suit that the Affordable Care Act only provides federal subsidies for exchanges set up by the states, as opposed to the federal government. The subsidies allow the federal government to enforce the employer mandate in states that refused to set up their own exchanges.

"We’re optimistic the court will recognize what states have known for months that the IRS disregarded the law by making the large employer mandate effective in Oklahoma or in any of the 33 other states without a state health care exchange," Pruitt said in a statement.

"We are confident that providing tax credits to individuals in every state is supported by the statute and our authority to interpret it," a Treasury Department spokesperson said.

The Treasury Department is implementing the subsidies through the Internal Revenue Service.

Pruitt argued before a congressional committee last month that the subsidies functioned to encourage the states to set up their own exchanges.

"When Congress passed the health care act, they presented states a choice," Pruitt told a subcommittee of the House Oversight Committee. "That choice was to establish a state health care exchange or to opt for a federal exchange. The ACA included with that choice a set of consequences and benefits."

The subsidies would be paired with the employer mandate, Pruitt argued. If the state decides not to set up an exchange, the state’s citizens would not get any subsidies—but there would not be any mandate or fines, either.

"Nobody really knows that the chances of the suit succeeding are, but it’s the most significant challenge out there," said Merrill Matthews, a health policy expert at the Institute for Policy Innovation (IPI).

The suit threatens to undermine the individual mandate as well as the employer mandate, Matthews said. If the federal government cannot legally subsidize insurance on the exchanges it runs, then insurance could become unaffordable for many individuals. If they cannot afford the insurance, then they do not have to buy it, reducing the pool of the insured.

If the suit is successful and the federal government is barred from providing subsidies for the exchanges it runs, the viability of the exchanges could be in trouble, some experts predicted.

"That will just be a huge blow to the exchanges being able to operate," said Sally Pipes, president of the Pacific Research Institute.

"That [suit], I think, is the best chance Republicans have to try to put a stop to this right now," Matthews said.

Factions of the Republican Party are debating how to best oppose Obamacare. Some are working to defund the law though the next resolution to fund the government, while others argue a one-year delay would be the better move.

A court ruling striking down the exchanges would start an extended political fight, predicted Ed Haislmaier, a healthcare policy expert at the Heritage Foundation.

"The first thing that would happen is that there would be enormous pressure on the states to set up their own exchanges," Haislmaier said.

Haislmaier said the number of people buying insurance through the exchanges would shrink drastically without the subsidy. However, he added that costs would not necessarily shoot up because insurance companies have to pool people who buy insurance outside of the exchanges with those from within them.

Pipes said any decision would be appealed to the U.S. Supreme Court, which would likely get to it next year—by which time the subsidies could have already gone into effect, unless they are delayed.

Because the subsidies will begin on Jan. 1, 2014, Pruitt is looking for a decision by the end of this year, Matthews said.

It is unclear what would happen to the subsidies if the suits against the exchanges are pushed into the new year and the subsidies start as scheduled. Pipes said that a court order would end the subsidies, while Matthews predicted that the courts would be inclined to rule in favor of the subsidies’ legality if they are already in place.

Andrew EvansEmail Andrew | Full Bio | RSSAndrew Evans is an assistant editor at National Affairs and a former reporter for the Washington Free Beacon, where he covered government accountability and healthcare issues.